Financial instruments play an important role in the modern society. A large number of financial instruments are issued and circulated everyday to serve as proof of ownership or to facilitate monetary transactions. Each financial instrument is typically either a physical or virtual document having some monetary value and/or recording a monetary transaction. The most common examples of financial instruments include cash instruments such as banknotes, stock certificates, bonds, checks, promissory notes, and certificates of deposit. More complex examples of financial instruments include derivative instruments such as options, futures, swaps and forwards which reference one or more underlying assets (e.g., asset classes of debt, equity, or foreign exchange).
For purposes of the present invention, financial instruments may be or include any type of documents, instruments, or objects (real or logical) that can be transferred from one party to another or play a role in business or financial transactions. One example may include payment media such as credit cards, debit cards, smart cards, stored value cards, gift cards, and the like. Another example may include bills of lading, letters of credit, and repurchase agreements. Financial instruments in accordance with the present invention may also include lottery tickets, raffle tickets, gaming chips, admission tickets, or other papers or objects that represent or provide (conditional or unconditional) monetary value or other types of entitlements to holders or accepters of such papers or objects. Furthermore, a financial instrument in accordance with the present invention may be or include a virtual instance, such as a unit of transaction data associated with one or more physical or virtual instruments.
Some financial instruments, such as those held within accounts, are continuously tracked and accounted for once they are issued or created. For example, physical copies of registered stock certificates typically are not passed from one stockholder to another. Instead, brokerage firms often keep physical custody of registered stock certificates and track ownership and transfers of the stocks in connection with investment accounts. A current record of true stock owners is also maintained by the stock-issuing corporation in a stockholder's register, usually based on periodic reports from the brokerage firms. Other securities, such as bonds and treasury bills, may be tracked with individual accounts in a similar fashion.
On the other hand, many financial instruments are circulated among various entities independent of accounts and/or without being tracked or traced, much like bearer papers. For example, banknotes can be passed from one private party to another in cash transactions. A negotiable instrument, such as a check, a bank draft, a money order, or a promissory note, can be transferred with a holder's signature. Such transactions can take place in secret and between anonymous parties, without detection by authorities. There is often a legal duty to report monetary transactions, for example for taxation or accounting purposes or to prevent funding of criminal activities. Failure to report certain financial activities (e.g., large amount of cash transactions or significant income) may lead to civil and/or criminal penalties.
However, without any mechanism to detect private transactions involving untraceable financial instruments, the authorities have to rely on voluntary self-reporting, periodic auditing or other imperfect mechanisms to enforce statutory or regulatory reporting duties for cash-based transactions and “cash businesses.” Self-reporting relies on the knowledge and volition of private parties involved in monetary transactions. For a monetary transaction to be adequately reported, at least one party involved therein must both know that there is a duty to report and be willing to fulfill that duty. Ignorance of the law or substantial financial incentives can prevent persons or entities from reporting their transactions. Sporadic auditing by the authorities can only catch a small fraction of violations such as tax evasion and money laundering.
While holding securities and recording transactions within an account-framework helps mitigate against failures to report or to comply with regulations, accounts do not completely prevent such fraud. Moreover, holding securities and performing transactions within an account-based framework necessarily forces a “middle-man” relationship resulting in fees having to be paid by the account-holder, restriction of the ability of the account-holder to operate completely freely, and in time-delays in executing transactions on behalf of the account holder. An example of the costs and shortcomings of such a middle-man relationship is the trading of financial instruments within the context of a stock market. Today's stock markets require costly, complex centralized services to connect buyers and sellers, and to provide pricing for and clearing of trades. Securities traded must be held in accounts, which adds costs and delays to trading. For example, Securities and Exchange Commission (SEC) regulations require that the brokerage maintain proof that orders, once entered by a customer, have been executed at the best price and as quickly as possible. Brokerages must therefore construct, support, and maintain costly infrastructure to receive, monitor, timestamp, record, and maintain records for all trades. Yet, even with all of this infrastructure and expenditure, the intent of speed and fairness on behalf of the customer is only partially met, for there is no regulation or fairness for what can be the most time-consuming portion of the process, namely the notification and provision of trading instructions by the customer to the brokerage concerning the trade.
In view of the foregoing, it may be understood that there are significant problems and shortcomings associated with current technologies for tracking financial instruments and related transactions. The problems and shortcomings may exist with respect to both account-based and non-account-based financial instruments and transactions.